timeless money wisdom

A Word to the Wise is Enough

-Poor Richard

I love the pithy sayings of Benjamin Franklin. Using the pseudonym of “Poor Richard,” Franklin published his Almanack from 1733 to 1758 which contained many Franklin maxims. Two of my favorites are:

“He that falls in love with himself will have no rivals.”

“Three may keep a secret, if two of them are dead.”

But he was especially insightful when he turned his wit and wisdom to money:

“He that is of the opinion money will do everything may well be suspected of doing everything for money.”

Franklin would not recognize modern finance if we could transport him to 2021.  ATM’s, credit cards, capital markets and digital currency would amaze him.

But his enduring insight into human nature’s struggle with money would remain intact. If we explained, for example, the greed that drove the 2008 financial crisis by exploiting sub-prime borrowers, he would likely shake his head. He may have hoped human nature would evolve, but he would see we still need guard rails to contain the moral frailty he warned about in the 18^th century.

It’s important to stay abreast of personal finance developments like Bitcoin and Robinhood. But I like to remember C.S. Lewis’s encouragement to not fall into “chronological snobbery.”

It’s an attitude that the thinking of an earlier time is inferior to that of the present. Insights from the past, especially about money and human nature remain as relevant as ever. Here are five of my favorite timeless words of wisdom on money from some of the great thinkers of the past.

• “How did you go bankrupt?  Two ways. Gradually, then suddenly.”  Ernest Hemingway

Remember when Wal-Mart first began to show up? I worked for a little drugstore at the time in a thriving downtown in a small community. Over time Wal-Mart grew more and more powerful until suddenly, it seemed, the downtown stores were closing because they couldn’t compete.

Or remember the first internet connection in your house? We put in AOL. The squeaky modem connecting us to the world was just a curiosity. Gradually at first, and then suddenly it seems, everything changed. The term “disruption” became a new business term for those innovative entrepreneurs who targeted old industries with a new online way of doing business. Remember travel agencies you used to call to book a flight?

As we manage our money, it’s important to remember these lessons if we invest in individual stocks.  What looks like a sustainable competitive advantage, and a good long-term investment, may be disrupted the way Amazon changed retail shopping. It’s one reason I like to invest in the whole market through low-cost index funds rather than take the risk on individual stocks. I remember Boeing and the airline stocks were recommended by the stock pickers not that long ago. Today, not so much.

• “Advertising is the art of convincing people to spend money they don’t have for something they don’t need.” Will Rogers

No one is as impressed with your “stuff” as much as you are. I’ve worked with people who were so image conscious that they would go deeply into debt to buy things they thought would impress their clients. It’s called social signaling and it’s highly overrated.  Psychologists tell us that people spend more time imagining that they had your nice stuff than they do admiring you for your cool image. Don’t get fooled by the slick advertising into thinking your stuff will bestow some higher level of importance.

• “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Mark Twain

Since 1950 the S&P 500 has experienced 36 double digit drawdowns. On average, that’s about one every other year. Since we entered the 21^st century, the market has experienced crashes of 50%, 57% and 34%. It’s a dangerous place if you are a short-term investor and not set up to weather a significant downturn. Panic selling at the low point of the market happens to those who don’t understand the way the market can drop. Knowing your risk tolerance, and structuring your balance sheet so you will psychologically be able to handle the inevitable downturns is a prerequisite to long term success.

• “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.” Warren Buffett.

I saw this stunning statistic the other day that was tweeted out: “If you invested $1,000 in Berkshire Hathaway in 1965, by 2009 your investment would have been worth $4.3 million. If Buffett had set up Berkshire as a hedge fund, and charged a 2% annual fee plus 20% of any gains, the investor would have been left with only $300,000.”

No one reading this newsletter probably has a hedge fund managing their personal account. But why pay the extra fees for actively managed funds when they have such a poor track record beating the low-cost diversified index funds that we all have access to? Take it from Buffett, there are a lot of Wall Streeters who live well off of managing others funds. A smart investor will not let this continue.

• “Dishonest money dwindles away, but whoever gathers money little by little makes it grow.” Proverbs 13:11

I love this proverb. Don’t be in a hurry to get rich. That’s when we make big mistakes and are tempted to hedge on our ethics. But by investing consistently with the money that comes from living below our means we have a guarantee of growing wealth over time.

These are a few of my favorite sources of wisdom from the sages, but I’d love to know who has been a source of money wisdom for you. Please post a comment and let us know!

Joe Kesler

Smart Money with Purpose